The Morning Call
8/26/14
The Market
Technical
The
indices (DJIA 17076, S&P 1997) just keep on, keepin’ on. The Dow finished within its short term
(16331-17158) and intermediate term (15132-17158) trading ranges, clearly a
very short distance away from the upper boundaries of those ranges. It remains above its 50 day moving average
and within a long term uptrend (5101-18464).
The
S&P again traded above its all-time high (1991). That re-starts the clock on our Time and
Distance Discipline. If it remains above
1991 through the close Wednesday, the break will be confirmed and the short
term trading range (1814-1991) will re-set to an uptrend. It closed within its intermediate term
(1887-2687) and long term (762-1999) uptrends and above tis 50 day moving
average. Clearly, the S&P is a mille
short hair away from the upper boundary of its long term uptrend.
Volume
remains quite low; breadth improved. The
VIX rose fractionally but finished well within short and intermediate term
downtrends and below its 50 day moving average---supporting the move up in
stock prices.
The
long Treasury was up, staying within its short term uptrend, its intermediate
term trading range and above its 50 day moving average.
GLD
returned to its old ways and declined, ending right on the lower boundary of a
building pennant formation---a break below this trend line would be yet another
technical negative factor weighing on GLD.
It closed within short and intermediate term downtrends and below its 50
day moving average.
Bottom line: the Dow moved closer to
the upper boundaries of its short and intermediate term trading ranges (and its
all-time high); while the S&P broke above the upper boundary of its short
term trading range for a second time (and its all-time high). A close above that level on Wednesday will
re-set the short term trend to up.
Further, it is very close to the upper boundary of its long term
uptrend. So it would appear that there
is a decent probability that we will witness some trend re-sets this week.
That said, the
Averages are still out of sync, the short term technical indicators are
stretched into overbought territory and those oft mentioned divergences
persist---not the least of which is our internal indicator.
My opinion is
that the indices are likely to re-set to up across all timeframes but will be
unable to confirm a breach above the upper boundaries of their long term
uptrends.
Our strategy
remains to Sell stocks that are near or at their Sell Half Range or whose
underlying company’s fundamentals have deteriorated.
Update
on NYSE margin debt (medium):
Fundamental
Headlines
It
was a busy Monday for US economic data. The
problem was that it was mostly disappointing---the August Markit flash service
PMI was well below expectations while July new home sales and the August Dallas
Fed manufacturing index were both down right awful. The one bright spot was the July Chicago Fed
national activity index which was strong.
This data causes me a little cognitive dissonance following the last couple
weeks’ really good economic numbers. Of
course, it is only one day’s figures; so at this point, it is not going to
cause me a lot of heartburn.
There
were a couple of international news items:
(1) Draghi
made some off the cuff comments suggesting that the ECB would more aggressively
pursue monetary easing (QE). Markets
seem to take great heart from that. Not
that the ECB won’t follow through; but let’s not forget that 90% of ECB [easy]
monetary policy to date has been lip service versus any action,
The EU and US
continue to decouple (short):
(2) new
developments occurred on the geopolitical front: [a] Russia appears to be sending another
relief convoy to Ukraine, [b] the UAE is bombing Libyan insurgent positions and
[c] Iran is claiming it shot down an Israeli drone. None of these seemed to hit investor radar;
however, they are reminders that global exogenous risks are not going away.
Bottom line: in
the absence of some significant geopolitical event, this pre-holiday week’s
focus will likely be on the Market itself, i.e. whether the Averages can break
to all-time highs or even challenge the upper boundaries of their long
term.
Certainly, there
was nothing in last week’s busy news schedule that would suggest a major follow
through. The economy remains on track;
though the situation in Europe and Japan are raising concerns. Geopolitical events could come into play but
they are wild cards. Monetary/fiscal/regulatory
policy is doing nothing to improve that outlook. Indeed, I believe monetary policy will
ultimately prove the unmaking of this Market.
In other words, there is nothing to improve valuations.
My
bottom line is that for current prices to hold, it requires a perfect outcome
to the numerous problems facing the US and global economies AND investor
willingness to accept the compression of future potential returns into current
prices.
I can’t emphasize strongly enough that I
believe that the key investment strategy today is to take advantage of the
current high prices to sell any stock that has been a disappointment or no
longer fits your investment criteria and to trim the holding of any stock that
has doubled or more in price.
Bear
in mind, this is not a recommendation to run for the hills. Our Portfolios are still 55-60% invested and
their cash position is a function of individual stocks either hitting their
Sell Half Prices or their underlying company failing to meet the requisite
minimum financial criteria needed for inclusion in our Universe.
It
is a cautionary note not to chase this rally.
First
half corporate earnings and the magic of accounting (medium):
The
latest from Lacy Hunt (medium and a must read):
Cumulative
net equity purchases by BofA clients (short):
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